How the Federal Budget Battle Affects California

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Lost in President Barack Obama's State of the Union speech this week was the potential impact of the federal budget battle on the states. The more that Congress cuts spending, the better things will be for balancing the federal budget. At the same time, those cuts will result in fewer federal dollars flowing to the states. For some states, the reductions may be little more than a nuisance. For California, any cuts in federal funds will be significant at a time when the state is trying to climb out of a $25 billion budget hole over the next 18 months--the largest of the fifty states.

During the current fiscal year, California received about $70 billion in federal grants-in-aid for various programs, not including $8.2 billion in one-time assistance from the Economic Stimulus Program. They include areas such as agricultural subsidies, public education, law enforcement, Medicaid, water resource programs, and transportation projects, to name a few. In most cases, the state ponies up a small matching amount ranging between 5 percent and 50 percent, depending upon the federal grant. But the point is that the feds pay the lion's share of these vital program areas.

The $665 billion in grants in aid dished out to the nation are the likely targets for budget cutters because the constituencies supporting such programs, while organized, are not as menacing to Congress as the supporters of big three spending areas: Social Security, Medicare, and defense. Together, these categories account for 84 percent of all federal expenditures. Simply put, it's easier to reduce funds for education or health than a get into a fight on Social Security benefits or a state of the art military hardware.

The fight may take place in Washington over the next few weeks, but the casualties will be found in the states. And in recession-weary California, the toll may be much more than the budget cutters anticipate.